Narrow Means Narrow

On May 26, 2015, the Supreme Court of the United States (SCOTUS) decided Wellness International Network, Ltd. v. Sharif—another case addressing issues raised in the wake of the Court’s “narrow” Stern v. Marshalldecision. While the case clarified some of the jurisdictional issues raised by litigants post-Stern, many issues remain and each Justice seems more content than the next to decide these issues on the narrowest grounds possible.

Review of Stern and Subsequent Related Issues

In 2011, in Stern, SCOTUS held that bankruptcy courts are constitutionally prohibited from entering final orders with respect to certain disputes that Congress had statutorily designated as falling within the bankruptcy courts’ “core” power. The Court referred to its holding as “narrow” and explained that the decision should not change the division of labor between bankruptcy and district courts.

Since 2011, courts throughout the country of grappled with the implications of this decision. As we previously discussed, in a follow-up decision issued last year, Executive Benefits Insurance Agency v. Arkison, the Supreme Court held that bankruptcy courts can issue proposed findings of fact and conclusions of law for the district court to review with respect to claims that raise Stern problems. (Stern claims are claims that are statutorily designated for final adjudication by the bankruptcy court but that are prohibited from proceeding in that manner because it would violate the Constitution.) While SCOTUS’s ruling in Arkison was helpful, it left unanswered other questions lower courts were struggling with:

What claims fall within the definition of a Stern claim?

Can parties consent to the bankruptcy court’s final adjudication of Stern claims?

Background of Sharif

For a complete review of the facts of Sharif, refer to our previous post, “Third Time’s the Charm: Supreme Court May Finally Clarify Bankruptcy Courts’ Power.” Stern was decided by SCOTUS before briefing in Sharif, on appeal, began. The debtor did not raise any Stern-related issue in opening appeal briefs to the district court. After a related party filed a motion to withdraw the reference and the Seventh Circuit decided a separate Stern-related case, the debtor filed a motion requesting permission to file supplemental briefing on Stern issues. The district court denied this request and the denial was appealed to the Seventh Circuit.

The issue presented on appeal was whether the debtor had waived the Stern arguments by failing to raise them during initial rounds of briefing. The Seventh Circuit, joining the Fifth and Sixth Circuits, held that litigants cannot waive a Stern objection because it implicates not only the litigants’ interests but also the broader interests of the judicial system’s structure and jurisdiction.

Sharif at SCOTUS

SCOTUS granted certiorari on two questions in Sharif: (1) whether the presence of a substantive state property law issue made the claim a Stern claim and (2) whether parties can consent to the bankruptcy court’s final determination of a Stern claim, and if so, whether consent may be implied or must be express. Justice Sotomayor, writing for the majority, declined in a footnote to decide whether the claim in Sharif constituted a Stern claim. Instead, SCOTUS ruled that because the bankruptcy court could enter judgment with the parties’ express or implied consent, the Court did not need to address this first issue.

SCOTUS asserted that its ruling on the second issue was “nothing new.” The Court referred to cases involving magistrate judges and referees, ultimately finding that parties’ entitlement to an Article III judge is a “personal right” and thus ordinarily “subject to waiver.” Then, the question for SCOTUS was whether allowing bankruptcy courts to decide Stern claims by consent would threaten the institutional integrity of the judicial branch. Again comparing bankruptcy judges to magistrate judges, SCOTUS noted that bankruptcy judges are appointed by and serve to assist Article III judges. Bankruptcy cases remain subject to Article III courts’ jurisdiction, heard by bankruptcy judges solely by reference from district courts. In response to the concern that allowing litigants to consent would offend the separation of powers, the Court noted that Article III courts retain supervisory authority over bankruptcy cases. According to the majority, since a district court, sua sponte or at the request of a party, may withdraw the reference to the bankruptcy court, the separation of power concerns were diminished.

The Court also focused on the practical effect of its decision, noting that to rule otherwise would have a meaningful impact on the division of labor among bankruptcy and Article III judges. SCOTUS noted that between October 1, 2013 and September 30, 2014, litigants filed more than 963,739 cases in bankruptcy court, which was more than double the total number of cases filed in district and circuit courts. After noting its ruling was consistent with Stern’s “narrow” decision, the Court described its ruling as “[r]eaffirming an unremarkable fact . . . .”

SCOTUS then turned to whether parties’ consent to adjudication by a bankruptcy court must be express. Relying again on precedent related to magistrate judges, the majority held that while consent may be implied, it must be knowing and voluntary. In making this determination, SCOTUS stated that the “key inquiry” is whether the party (or counsel) is aware of the need for consent and the right to refuse it, yet still voluntarily appears to try the case before the bankruptcy court. SCOTUS remanded this factual issue to the Seventh Circuit. The Court, however, did state that “it is good practice for courts to seek express statements of consent or nonconsent.”

Conclusion—SCOTUS Will Likely Continue to Revisit Stern Claims

Sharif has clarified that bankruptcy courts can enter final judgments with parties’ consent. The consent must be knowing and voluntary, but it may be implied. This holding appears to apply regardless of whether a claim is a Stern claim or not.

The majority, concurring and dissenting opinions each attempted to resolve Sharif on narrow grounds. By doing this, the Supreme Court continues to leave Stern-related issues unanswered (and hotly contested).Significantly, the Court did not address a concern that continues to plague bankruptcy courts and litigants—what constitute Stern claims. The Court has avoided this issue in each of its decisions by ruling on very narrow grounds. Ultimately, though, without Supreme Court precedent to guide lower courts and litigants on this issue it will be raised again and again in fraudulent transfer, and other, cases.

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The strength of our global bankruptcy, financial restructuring and insolvency practice lies in our multidisciplinary experience and international reach. Based throughout Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia, our bankruptcy lawyers handle some of the most complex and sensitive domestic and cross-border assignments across the globe.

About

The strength of our global bankruptcy, financial restructuring and insolvency practice lies in our multidisciplinary experience and international reach. Based throughout Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia, our bankruptcy lawyers handle some of the most complex and sensitive domestic and cross-border assignments across the globe.